Surge in Sterling Could Delay Interest Rate Hikes

As Britain’s Chancellor of the Exchequer, George Osbourne, rises to give his 5th budget speech the Pound is undergoing a minor selloff. The budget is largely being seen as neutral to expansionary, perhaps with the exception of a proposed welfare spending cap, however it is the reference to growth that has the markets a little concerned. Osborne has projected that the UK will experience 2.7% GDP expansion this year but that this is likely to fall back to 2.3% in 2015. Finance Ministries however have a tendency to underestimate growth forecasts, particularly in the good years.

Before this afternoons selling, Sterling underwent a nice rally earlier this morning. The Bank of England published the minutes of it’s recent Monetary Policy Committee meeting, again all nine members were opposed to moving interest rates for now.

Employment data also helped boost the Pound, the very slight fall in the rate of unemployment was lost in rounding as for the second month in a row the rate came in at 7.2%. Average incomes however have increased the pace at which they are rising, the data just announced for January showed an increase of 1.3% compared with just 1.2% the previous month.

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All is going well in the British economy, although still running a deficit, debt reduction measures are in place. GDP growth currently stands at 2.7% and inflation is bearable at 1.6%. This is likely to prompt the Bank of England to revisit it’s monetary policy stance sooner rather than later. The market has priced in a series of rate hikes beginning in Q1 2015 but speculation is starting to mount that the Bank will have to tighten things up well before that.

This is what is keeping the British Pound very well bid. The last 12 months have seen a 10% appreciation in Sterling which is once again challenging the top of it’s long term range against the US Dollar. In fact the Pound now holds the dubious title of the fastest growing developed currency of the last year recording gains against virtually all other major currencies.

This puts the Bank of England in a bit of quandary, in order to maintain competitiveness and address the trade imbalance the Pound must be weakened, this is a difficult thing to do when faced with bringing forward the interest rate hiking schedule.

To contact the reporter of this story: James Brennan at james@forexminute.com

Samuel Rae is an active retail trader across a variety of assets, including currencies, stocks and commodities and the author of Diary of a Currency Trader (Harriman House). His personal strategy focuses primarily on classical technical charting patterns with a fundamentally supportive bias, combined with a strict, risk management-driven approach to entries and exits. He is an Economics graduate from Manchester University, UK.

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